Financial Inclusion in India and Its Challenges

Interest rates on small savings schemes like PPF, SCSS, and NSC are under review by Modi 3.0 government 


From UPSC perspective, the following things are important :

Prelims level: Small Savings Schemes

Mains level: Impact of Stable Interest Rates on Small Savings Schemes

Why in the news? 

The central government of India is set to announce the interest rates for various small savings schemes, including the Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY), and Post Office Monthly Income Scheme (POMIS), for the July-September 2024 quarter by June 30, 2024.

Current Interest Rates and Expected Changes

  1. Public Provident Fund (PPF)
  • Current Rate: 7.1%
  • Expected Rate: Despite the benchmark 10-year bond yield averaging 7.02% from March to May 2024, which would suggest a rate of 7.27% according to the formula, experts believe the government will likely maintain the status quo.
  • Reason: Factors such as controlled inflation, stable 10-year G-Sec yields, and historical precedence of the government not strictly following the recommended formula indicate a low probability of rate hikes.

2. Senior Citizen Savings Scheme (SCSS)

  • Current Rate: 8.2%
  • Expected Rate: Unlikely to see significant changes.
  • Reason: With a spread of 100 basis points, the SCSS offers a substantial return, and experts predict the government will maintain existing rates to manage fiscal policies effectively.

3. Sukanya Samriddhi Yojana (SSY)

  • Current Rate: 8.0%
  • Expected Rate: Expected to remain stable.
  • Reason: The SSY enjoys a spread of 75 basis points. Given the controlled inflation and fiscal policies, a rate hike is not anticipated.

Factors Influencing Interest Rates

  • Benchmark Yields: The interest rates for small savings schemes are linked to the yields of 10-year government securities.
  • Market Conditions: Prevailing market yields and inflation rates play a crucial role in determining these rates.
  • Government Policy: The central government’s fiscal strategy and policies, such as those outlined in the Union Budget, impact decisions on interest rates.

Impact of Stable Interest Rates on Small Savings Schemes

  • Investor Sentiment and Returns
    • PPF: Investors in PPF may feel disappointed due to the stagnation in interest rates despite a slight uptick in benchmark yields. However, PPF still offers tax-free returns under the Exempt-Exempt-Exempt (EEE) status, making it an attractive long-term investment.
    • SCSS and SSY: Stability in interest rates ensures a predictable income stream for senior citizens and parents of girl children, maintaining their trust in these schemes.
  • Government Fiscal Management: Maintaining the current interest rates helps the government manage its fiscal deficit more effectively. Higher rates would increase the interest burden on the government, especially for widely subscribed schemes like PPF.
  • Inflation Control: Stable interest rates reflect the government’s confidence in managing inflation. By not increasing rates, the government signals that it sees inflation as under control, thus aiming to keep borrowing costs stable for both the government and the public.
  • Market Stability: Consistent interest rates contribute to market stability. Predictable returns on small savings schemes help in the planning of household finances, ensuring steady savings and investments. This stability can also foster overall economic stability by maintaining consumer confidence.

Conclusion: Investors in PPF, SCSS, and SSY should prepare for the possibility that interest rates will remain unchanged for the July-September 2024 quarter. While the formula indicates room for an increase in PPF rates, historical trends and expert opinions suggest that the government may maintain the current rates to balance fiscal control and market stability.

Mains PYQ:

Q Pradhan Mantri Jan-Dhan Yojana (PMJDY) is necessary for bringing the unbanked to the institutional fiancé fold. Do you agree with this for the financial inclusion of the poorer section of the Indian society? Give arguments to justify your opinion. (UPSC IAS/2016)

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